FR – May 2015 – L2 – SB – Q6 – Associates and Joint Ventures (IAS 28)

Explain the equity method, conditions for discontinuation, and evaluate types of audit evidence.

Question

(a) IAS 28 – Investments in Associates and Joint Ventures permits the application of the equity method when accounting for investments in associates and joint ventures.

Required:
Explain briefly the Equity Method and state the circumstances under which an entity can discontinue the use of the equity method under IAS 28. (5 Marks)

(b) Agbantara Plc. acquired equity shares from Odinma Plc. and Dangari Limited. The following are the Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2014 for the three companies:

Company	Agbantara Plc.	Odinma Plc.	Dangari Ltd
Revenue	N4,500	N1,350	N630
Cost of Sales	(N2,430)	(N720)	(N270)
Gross Profit	N2,070	N630	N360
Admin Expenses	(N1,350)	(N180)	(N135)
Finance Income	N135	N90	–
Finance Costs	(N180)	–	(N90)
Profit Before Tax	N675	N540	N135
Income Tax Expense	(N225)	(N135)	(N45)
Profit for the Year	N450	N405	N90

Other Comprehensive Income:

Gains on Property Revaluation (Net of Tax):
- Agbantara Plc: N180
- Odinma Plc: N90
- Dangari Ltd: N45

Total Comprehensive Income for the Year:

Agbantara Plc: N630
Odinma Plc: N495
Dangari Ltd: N135

Additional Information:
(i) Agbantara Plc. acquired 72 million ordinary shares in Odinma Plc. out of its 120 million ordinary shares at a nominal par value of N1 each for N160 million. The shares were acquired four years ago when Odinma Plc. had a N15 million credit balance in retained earnings. During the year, Odinma Plc. sold goods costing N38 million to Agbantara Plc. for N45 million, which remain unsold at year-end.
(ii) Agbantara Plc. acquired 35,000,000 ordinary shares in Dangari Limited out of 100,000,000 ordinary shares. The shares were acquired three years ago when the company had a credit balance on its retained
earnings of N10,000,000.
(iii) Agbantara Plc’s group policy is to measure non-controlling interests (NCI) at fair value. NCI at acquisition date in Odinma Plc. at fair value was N48,000,000. Impairment test carried out on the goodwill relating to Odinma Plc. and investment in Dangari Limited at year end resulted in N10,000,000 and N15,000,000 losses respectively.

Required:
Calculate Agbantara Plc.’s share of profits from Odinma Plc., considering the unrealized profit. (5 Marks)

Answer

(a) Explanation of the Equity Method and Discontinuation Conditions

Equity Method: Under IAS 28, the equity method is applied when an investor has significant influence over an associate or joint venture, typically represented by owning 20%-50% of the voting shares. The investor initially records the investment at cost and subsequently adjusts for its share of the associate’s or joint venture’s profits or losses.
Discontinuation Conditions: An entity should discontinue the equity method if:
- It loses significant influence over the associate or joint venture.
- The investment becomes a subsidiary or an asset held for sale.
- There is evidence that the associate or joint venture is in liquidation or severe financial distress, impacting future benefits from the investment.

(b) Calculation of Agbantara Plc.’s Share of Profits from Odinma Plc.